As Kansas struggles to deal with a budget deficit, Democrats and some Republicans are proposing tax increases, particularly an increase — temporary, they say — in the sales tax. A common argument advanced is that an extra one cent tax on every dollar spent will hardly be noticed. The one cent tax used to build the Intrust Bank Arena in downtown Wichita is cited as an example of a sales tax used for the common good of the people.
Besides the fact that it’s way too early to judge the success (or not) of the arena, sales taxes do hurt.
My post from 2004 Prepare for sales tax-induced job effects now described job losses in Little Rock due to the sales tax that paid for that city’s arena. In this example, the job losses were smaller than the number of jobs created by construction. This is partly because the sales tax lasted just one year, and more importantly, the state of Arkansas paid for 40% of the arena’s cost. In other words, the entire state subsidized the construction job gains in Little Rock. Still, jobs in retail and service industries were lost.
If the state of Kansas raises its sales tax, we won’t have the luxury of a huge inflow of out-of-state money to duplicate the effect observed in Little Rock from the inflow of out-of-city money. Instead, it’s certain that a sales tax increase will negatively affect private sector jobs and our state’s economic growth and future.
As evidence, a 1996 study by the Federal Reserve Bank of Atlanta found that state and local taxes negatively affect a state’s growth rate, and that this effect of taxation is sizable. This study looked at all taxes.
Specifically considering sales taxes, a 1998 study by the Beacon Hill Group looked at the effect of a half-cent increase in Ohio’s sales tax. The study “found that an increase in the state sales tax rate from 5% to 5.5% would result in the loss of at least 49,000 jobs and would leave Ohio’s stock of capital at least $4.4 billion smaller.” The authors concluded there was a 90% certainty that this result would occur.
More recently, a 2009 proposal to increase Washington’s sales tax from 6.5% to 6.8% was analyzed by the Evergreen Freedom Foundation. Its conclusion was that the tax increase “would cost the private sector approximately 6,800 jobs and result in less disposable income for Washington residents.
A sales tax increase will provide funding for more public sector jobs at the expense of private sector jobs. The result is a loss of economic freedom as individual choice is replace by spending controlled by the legislature and government bureaucrats. Does anyone believe that government spends as wisely as people spend their own funds? I don’t.